Green Room

More on income and wealth

After reading my post on wealth mobility and Dane Smith’s latest cri de coeurfor lost tax revenues, University of St. Thomas economist John Spry writes to Dane and me about a new paper by Gerald Auten and Geoffrey Gee on income mobility. (The paper in the National Tax Journal, but the first link above is to an ungated copy without the tables. You can find the tables here.) Auten and Gee have some presentation slides as well if you want a lighter skim.

The importance of the study, John writes, is that by use of IRS records Auten and Gee can track the same individuals over time:

By tracking the same people over time it can answers questions like: how has income changed for people that were in a particular income quintile in 1996 by 2005 (adjusting for inflation)? This is a different question than comparing people in a particular income quintile in 1996 with the set of people in the same income quintile in 2005. Some of the same people will be in the same income quintile, but some will move up or down.

John suggests you look at Table 4 (scrolling the table link), which is also the basis for most of the presentations slides. It is a little too hard for me to format, but this should do:

Percent Change in:

1996 Income Mean MedianQuintile Income Income

Lowest 186.8 77.2

Second 60.4 36.9

Middle 40.0 24.4

Fourth 31.7 17.9

Highest 25.8 8.6

Tap 10% 26.6 0.3

Top 5% 27.8 -10.6

Top 1% 10.1 -30.9

All Income Groups 37.1 22.7

Their main conclusions (quoting from the introduction):

There was considerable income mobility of individuals in the U.S. economy over the 1996-2005 period. More than half of taxpayers (57.5 percent by one measure and 55 percent by another measure) moved to a different income quintile over this period. About half (56 percent by one measure and 42 percent by another) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

Median incomes of taxpayers in the sample increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Furthermore, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. In contrast, the real median incomes of taxpayers who were in the highest income groups in 1996 declined by 2005.

The composition of the very top income groups changed dramatically over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005.

The degree of relative income mobility among income groups over the 1996-2005 period was very similar to that over the prior decade (1987-1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility neither increased nor decreased over the past 20 years.

Upward and downward mobility is affected by many factors. Based on a regression analysis, we find that initial position in the income distribution and changes in marital status are among the more important factors associated with changing positions in the income distribution.

I’ll add in my defense that wealth distribution and income distribution are different, and I took Dane’s challenge to be about the former. Still, the Auten and Gee study is quite important insofar as it uses individual tax return data to trace the path of a person in 1996 to where their income goes over a decade.

I found this fact quite interesting: For the top 1/100th of 1% of the income distribution — the 11,700 wealthiest tax filers in 1996 — their 1996 income was $11.6 million and their 2005 income was $4.1 million. Not suffering at all, but still a fall in median income of near 65%.

(P.S. I’ll continue posting on this topic for a few more weeks at my blog; please stop in.)